KHDC 066 – What is Revenue Management?

A guest room is a perishable product, for this reason, managing pricing and customer happiness remain the very important variables.

Welcome to another addition of hospitality property school.

Today, I’m going talk about “What is Revenue Management”

Why did you want to become a hospitality property owner?

The idea of becoming a hospitality property owner and greeting guests sounded appealing.

You were tired of the rat race and wanted to take control of your own destiny.

Or like most owners, you wanted to make money or even better, to make more money in less time

One of the main factors you need to be successful and make more money in less time it is for you to understand revenue management and why it is important.

It is what propels hotels, resorts, inns and bed and breakfasts success.

It does not matter the size of your property, a guest room is a perishable product, since the number of guest rooms you have is defined. For this reason, pricing and customer happiness remain the very important variables, which are subject to Hospitality Property Revenue Management.

Efficiently managing rates and availability while watching on all the different key performance markers takes training and talent. Branded hospitality property chains have department that only focus on these reports which results in well-organised revenue management strategy. This is not the same for smaller properties because time and resources are limited, might take a short-term approach to revenue management.

Knowing how to understand the reports is an invaluable resource because they can help hospitality property owners make choices that will result in positive outcomes.

Key Performance Indicators (KPIs)

You need to know and understand the following numbers to manage the revenue of your hospitality property.

Occupancy Rate

Average Daily Rate (ADR)

Revenue Per Available Room (RevPar)

Total Revenue/Rooms Sold

Occupancy Rate

This is one of the easiest metrics you can check.

It is the percentage of occupied rooms compared to total rooms over a certain period of time.

Occupancy = Rooms Occupied / Rooms Available

Knowing these numbers will help you create the foundation of your revenue management strategy.

Revenue Per Available Room (RevPar)

RevPar is an operation metric which is analysed by multiplying a hospitality properties average daily room rate by its occupancy rate.

You can also analyse RevPar by dividing a hospitality properties revenue by the number of rooms (or beds) it has over a desired period of time.

RevPar = Total Room Revenue / Rooms Available

RevPar only uses room revenue and does not include other revenue streams such as upgrades, spas, restaurant revenue, etc. You can use this analyse to compare performance to other properties, but it could fluctuate greatly by property type.

Average Daily Rate (ADR):

ADR calculates the average price paid per room and helps you determine how much money was brought in per room. You calculate ADR by taking the Room Revenue and dividing it by the number of paid rooms occupied.

ADR = Room Revenue / Paid Rooms Occupied

ADR only considers the rooms that were sold – does not include vacant rooms.

Other Important Metrics:

There are other important metrics you need to consider when you create reports.

They include:

total rooms sold

total revenue

revenue divided by category (i.e. rooms. restaurant, spa, etc.)

How to Play Like the Big Boys

How to approach revenue management

Take a Long-Term Approach

Use Market Information

Analyses

One of the major differences between large-branded hospitality property and smaller independent properties is forecasting.

Quite often, an independent property owner will look at the current month’s revenue & forecast and might decisions that will affect the entire year. A larger or branded hospitality property will take a look at how the current day and month play into the season, quarter, and year.

Even though smaller independent hospitality properties do not have the same resources as larger properties, there are a few things you can do.

Take a Long-Term Approach

When you only look at your revenue strategy on a monthly, your property could be leaving money on the table. Larger properties generally look at revenue and rates by quarters and seasons, rather than by months. When you take a more long-term approach to rates and revenue, you can more correctly react to current market conditions.

For example, if you’re in the high season and bookings are soft, you have an idea what you need to make up in the following months. Or, if your next month’s bookings are higher than expected, you can raise rates to make up for this month’s lost revenues.

If you handle your rates and revenue monthly, you are more likely to make thoughtless reactions. This means you might make needless changes that could end up costing you more than your current situation.

For example, if your current bookings are too soft, your first reaction might be to reduce rates to increase demand. But, if you take the whole season into consideration, you might realise that you last month performance was pretty good and you need not worry about fewer bookings at regular prices. More guests in your property doesn’t always mean more revenue generated.

This is why your ADR is so important.

You can lower your rates and generate more demand, but you have to make sure your revenues and profit are still higher.

The thing to remember here is that you should be looking at your rate and revenue targets by quarter or season instead of monthly. Every property is different, so there is no definitive forecast structure that makes sense for every property.

Use Market Information

Large branded hospitality properties have the benefit of knowledge. They have the resources to purchase market reports that include information about rates, availability, and projected demand.

If you don’t have the resources to buy your own market research reports because they are expensive, you can also check your local tourism websites and offices for up-to-date information. Tourism offices often publicly release information on demand forecasts, upcoming events, and other information that could be useful while planning out demand that influences rates.

You want to make yourself aware of market trends as well as local travel trends to have the most success. Knowledge is power and you want to prepare yourself as much as possible.

Write Analyses

Large branded hospitality properties write analyses every month that report on how rates and revenue performed.

This could be very time consuming for any hospitality property owner, so you might want to consider just analysing those months where you don’t meet your goals. This is important because it means that you did not correctly read the market.

Detailed reports containing how and why you missed your goals will help you prevent those mistakes in the future.

Analyses are particularly helpful for the same season next year when market trends tend to copy each other. Without analyses, you might not remember exactly what happened a full year earlier.

Once you are comfortable putting together the analyses, you could start doing the same for the good months. If you make a decision and read the market correctly, you will likely want to remember what you did to replicate it in the future.

Conclusion

By learning and understanding the Key Performance Indicators and following the three steps to revenue management

Take a Long-Term Approach

Use Market Information

Analyses

You will be able to operate your hospitality property like the large branded properties and stay ahead of your competition.

In the next podcast, we’ll look at the List of Reports You Should Run Every Night.

If you have any interesting stories about using revenue management and would like to share or have any questions or feedback you can leave them in the comments section of the show notes.

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